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Ankit (none)     04 February 2011

Tax liability on lending money to friend

Hi,

I have to lend more than Rs. 10L to my friend. I want clear documents so that there is no tax/legal problems later. What paper work is required? and What details should be included in the document?

If I get any interest, what will be the tax liability?

Many many Thanks

p.s. I asked this question in legal forum but since my concern is tax issue I am placing the request here.



Learning

 8 Replies

A V Vishal (Advocate)     04 February 2011

If I get any interest, what will be the tax liability?

Ans. The interest income will be clubbed with the other income like salary, business, profession, house property and taxed accordingly, however, in absence of the ROI and other details of income it is impossible to calculate your tax liability. The Current slab of tax as per the existing tax laws will be applicable.

1 Like

dhiraj aggarwal (TAXPOINT (Director) 9829551008)     08 February 2011

Dear Ankit,

 

If u lend money to ur friend without any interest then plz make sure if in future ITO ask about that Why u give him/her money without any interest ?

You can one thing give the money throught the cheque and then show in books also and there after when u take money back from your friend then take in cheque form.

OR

U can give money to him/her at a very nominal interest rate and this vl b club in your other source of income.

 

Dhiraj Aggarwal.


99998-21710

Taxpoint Consulting Pvt Ltd

 

1 Like

Rahul (Director)     27 July 2011

Hi,

This query is an extention of Ankit's. I would like to do my business by borrowing money from my friends. I am planing to collect about 50 Lacks - 1 C all together (everything in Cheque and Net transfer) from different friends. They all are planing to give me the amount without interest too. But, inorder to avoid any tax issues, do they have to charge an interest on the amout they are lending? If yes, what is the minimum amout to be charged according to Indian law? Also, is there a limit on the amount which I can borrow from friends and do my business?

Thanks,
Rahul.

Vineet (Director)     04 August 2011

A friendly loan may be without any interest and there is no provision to charge any notional interest on the same.

 

Precautions and documentation:

1. All loan transaction should be by account payee cheque or bank draft

2. If you are giving loan which is interest free, please ensure that loan is out of your own savings and not intereset bearing borrowed funds. If you are paying interest on borrowed funds, charge interest on loan agiven atleast equal to the rate of your borrowed funds.


3. If you are accepting loan, need to be more cautious regarding creditworthiness of your lender. They should be men of means and could prove the same with documents.

 

There is no limit of borrowing for business purposes, provided your lenders have capacity. Yes, your bankers may have issues with these friendly loan if you are planning to borrow from them too.

Sajeev Menon (Legal Consultant Dubai 00971 508836442)     09 August 2011

Hi,

please be noted that lending money for interest without proper license is illegal. Friendly loan cant be charged with interest and cant be documented as well.

Rahul (Director)     26 August 2011

Thanks a lot Vineet, I appreciate your detailed explanation.

Sadashiv Rupchand Gaikwad (Partner)     10 September 2011

To show more unsecured loan  in the liabilities is invitaion for Scrutiny assessment which is danger to prove.

Ashutosh (NA)     22 September 2014

Hi All, 

Is they below analysis still valid in 2014 ?

Thanks

Originally posted by : Vineet


A friendly loan may be without any interest and there is no provision to charge any notional interest on the same.

 

Precautions and documentation:

1. All loan transaction should be by account payee cheque or bank draft

2. If you are giving loan which is interest free, please ensure that loan is out of your own savings and not intereset bearing borrowed funds. If you are paying interest on borrowed funds, charge interest on loan agiven atleast equal to the rate of your borrowed funds.


3. If you are accepting loan, need to be more cautious regarding creditworthiness of your lender. They should be men of means and could prove the same with documents.

 

There is no limit of borrowing for business purposes, provided your lenders have capacity. Yes, your bankers may have issues with these friendly loan if you are planning to borrow from them too.

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